| ABOUT THE FIRMS |
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Dana Consulting Group, Ltd. and
Jennings Law Firm, Ltd. were established to provide employers with a single source of comprehensive legal and consulting services relating to retirement plan and employee benefit matters.
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If you know someone who would like to receive
the dana report, click the link below.
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ILLINOIS MAY BE LOOKING TO TAX YOUR 401(K) AND IRA
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Presently Illinois does not tax residents on distributions from qualified retirement plans and IRAs. The Civic Federation (apparently a nonpartisan budget watchdog) has teamed up with the Civic Committee of the Commercial Club of Chicago to recommend that Illinois start taxing these distributions. As our Illinois readers know, our new governor, Jay Pritzker, wants to amend the state constitution to permit a graduated income tax structure.
Our Comment: We strongly urge all of our Illinois readers to contact their state representatives and make their views clear about how they view taxing retirement income, as well as raising their income taxes. We would also like to point out the last time Illinois had a balance budget was 2001 (18 years ago).
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ROBERT REISH & THE NEW FIDUCIARY REGULATION
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One of the many publications we read has two great articles about retirement plans and the status of the fiduciary regulation. Our readers may remember we reported in an earlier edition of the dana report that the US Fifth Circuit Court of Appeals threw out the Labor Dept's fiduciary regulation, creating a void. The SEC now intends to step into that void and issue their own fiduciary regulation, perhaps as early as June. We recommend any person who services retirement plans from the investment side to read these articles. Please give Lee Jennings in our office a call if you would like a copy of the articles. Lee can be reached at (630) 802-7644.
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PlanAdvisor magazine, a publication covering employer retirement plans from an investment perspective, defines the micro plan market as those retirement plans with $5 million or less in assets. The magazine conducts an annual survey and reports on its findings, which can be downloaded from their website. Some of the findings include:
- Highest participation rates are accounting firms (92.7%) with the lowest rate among restaurants (57.5%).
- Highest average account balances are law firms (just under $185K) with lowest balances at automotive firms (just over $23K).
- Highest deferral rates are among professional services firms such as consulting, engineering and technology) and the lowest rates among health care (not for profit), utilities and automotive firms.
- Financial education: 44% offered by all plans, with only 19% for plans with under $1 million in assets and 28% for larger plans.
- Advisor fiduciary status: about 25% for all plans.
- Immediate eligibility to defer: 37% for all plans, 22% for plans with $1 million in assets and 20% for larger plans.
- Participation rates: 79% for all plans, with 73% for plans with $1 million in assets and 76% for larger plans.
- Plan fees: 47% of all plans have the plan pay the fees, with 31% paid by the plan sponsor.
Some thoughts:
- These kinds of surveys are interesting since they allow for a "back of the envelope" comparison with your own plan (or your clients' plans). That said, plan sponsors and their plans, and their employees, are generally different for different reasons.
- We think offering some kind of fiduciary service (or protection) is ok but hardly a reason by itself to hire or retain somebody. These outside parties have little control over your plan and have little incentive to put their heads on the block for your omissions. Plan sponsors (including their owners and decision makers) control the plan and are in the best place to make the right decisions. The best approach we think is to hire knowledgeable TPAs and advisors who can review the plan and make meaningful recommendations.
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FORM 5500 EXEMPTIONS FOR WELFARE PLANS
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Most employee benefit plans that are subject to ERISA are required to file Form 5500 each year with the government. There are exceptions. The filing rules are different for retirement plans and welfare plans. Generally speaking, any plan that is not a retirement plan is considered a welfare plan.
Welfare plans that cover less than 100 participants are generally exempt from filing Form 5500 unless the plan is considered "funded." Larger plan must file. MEWAs have different rules.
Certain plans are also exempt, such as plans providing only certain specified benefits, regardless of the number of covered participants. Exempted plans include day-care benefits, certain apprentice and training programs, and nonqualified deferred compensation plans (NQDC plans). However, NQDC plans are subject to a one-time filing to claim the exemption.
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DEFINED BENEFIT PLANS VS AUTOMATIC ENROLLMENT 401(K) PLANS
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Many pundits have long claimed that the decline of the traditional pension plan (called defined benefit plans by ERISA) has played a large role in Americans' reduced retirement security. That may or may not be true but the Employee Benefits Research Institute (EBRI), a firm covering the employee benefits industry, has examined the level of benefits that a 401(k) plan using automatic enrollment provides compared to a final-average pay defined benefit plan (DB plan). The results are surprising. Some of the study's findings are:
- The break-even rate - or the percentage accrual rate that would be required in the DB plan to generate the same level of retirement income that is projected to come from a 401(k) plan using auto enroll - is rarely less than 1.5% of final pay.
- In only two of 16 combinations of wage quartiles and years of plan eligibility for males are the DB plan break-even rates less than 1.5% of final pay times years of service.
- For females, only five of 16 combinations have break-even rates under 1.5%.
The study acknowledges that assumption changes can significantly affect the results.
Our Comments :
- The study suggests Americans could be better off with auto enroll 401(k) plans than if they were only covered under a DB plan. Intuitively that seems odd to us. My parents had pension plans that provided lifetime monthly income. Just the certainty of ongoing income had to be a huge benefit of these plans.
- The study acknowledges that 401(k) plan investment returns can significantly affect the outcome. That is obvious but highlights the risk 401(k) participants face when they are forced to make their own investment decisions.
- Congress had tried to resurrect the traditional pension plan with the cash balance plan (CB plan). A CB plan has significant design differences to the traditional pension plan but it can provide a base benefit that when coupled with a 401(k) plan can significantly boost an employee's expected retirement income. Congress also recognizes that small companies will likely only establish a CB plan if the plan provides significant benefits to owners. Well, that is exactly what a CB plan can do, particularly when coupled with a 401(k) plan.
- We have posted to our website under the Education Center tab an article that explores how CB plans can preserve or increase the new pass-thru deduction under IRC 199A. Don't think Congress does not understand what motivates small business employers. CB plans can play an important role in how business owners design the companies' retirement plans to maximize their own tax benefits.
- Finally, the EBRI study looks at 401(k) plan using automatic enrollment. If your 401(k) plan, or your clients' 401(k) plans, are not using automatic enrollment (and auto escalate), this is a feature you really need to look at.
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